Parliament must still approve the decision, taken by the Cabinet, to allow judges to impose sentences other than capital punishment on drug smugglers, but it is expected to do so.
Azalina Othman Said, a minister in the prime minister's department, revealed the decision to overhaul colonial-era drug-trafficking legislation from the 1950s in response to a question in parliament.
"We welcome the move as a recognition that the mandatory death penalty is an egregious form of punishment," said Amnesty International Malaysia executive director Shamini Darshni Kaliemuthu.
Malaysia imposes the mandatory death penalty for other crimes, including murder and terrorism-related offences.
Neighbouring Singapore passed legal reforms in 2012 abolishing mandatory death sentences for some drug trafficking and murder cases.